Balance transfer credit cards: What to consider first

By UK CreditCards.com

If you are
paying hundreds of pounds every year in credit card interest, then transferring your balance to a lower-rate card may seem like a no-brainer. Balance transfer credit cards are plentiful and, depending on your credit history, you can often switch
your balance to a zero rate of interest for between 6 and 18 months.

However, these short-term balance transfer deals may not be the best
solution for you if you don't plan to pay off your balance any time soon. In fact, picking a 0% APR balance transfer could actually cost you money in the long
run. Here's why:

Finding the right balance transfer credit card isn't just about
the interest rate
On the face of
it, seeking out the lowest credit card balance transfer rate might seem like an obvious way to save money. After all, the aim
of doing a balance transfer is to reduce the interest that you pay
on the borrowing on your card.

However, there
is a more important factor to consider when researching
balance transfer credit cards: The time it is likely to take you to repay
your balance in full. This is often more important than the credit card interest rate.

If you are sure
that you can repay your credit card balance in full within the 0% promotional
period -- typically between 6 and 18 months -- then you should consider such a
card. You will benefit from paying no interest whilst you repay your balance in full.

However, if you
don't think that you will be able to clear your card balance in full during
this period, you may be better served choosing another type of deal. Once your 0% interest rate expires, you will have to pay credit card interest at the provider's standard rate, which could well be 15 to 20% or higher.

A long-term balance transfer may be a better choice
If it will take
you longer than a few months to repay your credit card balance, then you may want to
consider a long-term or ‘lifetime' balance transfer deal. These deals offer a low rate of interest for
the lifetime of the balance.

While you may
pay a higher rate than a short-term deal, the rate lasts for the entire time
you maintain your balance, however long this may be. Depending on how long it takes you to pay down your balance, you could end up paying
significantly less interest in the long term.

If you plan to
take out a short-term balance transfer deal and then move your balance again
once that deal expires -- some newspapers call these people ‘rate tarts' -- then
it may still end up being more expensive than a long-term balance transfer
deal. You will end up paying a balance
transfer fee of around 3% each time you switch your balance. You
should also bear in mind that there is no certainty that low rate balance
transfers will continue to be available in the future. In addition, your
circumstances could change over a period of time, meaning you're no longer
eligible for certain credit cards.

Tip:If you're
considering transferring your credit card balance to a new card, take out a calculator and figure out how long it will
take you to repay the balance. Then, pick the appropriate type of deal. If you
don't, it could cost you hundreds.

How do banks benefit from long balance transfer offers? – Banks are competing to offer the longest 0% interest balance transfer deals, which is great for consumers, but what's in it for the banks? There are still a few ways for companies to make money off you, even if you aren't paying interest ...